Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us at the Qantas Financial Year 2022 Investor and Analyst Results briefing. My name is Filip Kidon, and I am the Head of Investor Relations for the Qantas Group. I'd like to begin today's session by acknowledging additional custodians of the land on which we meet today, the Gadigal people of the Eora Nation and pay our respects to elders, past, present and emerging. I'd like to now introduce our Chief Executive Officer, Alan Joyce; and our Chief Financial Officer, Vanessa Hudson, who will take you through the results.

Thanks, Fil. Can I also acknowledge the traditional owners of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging. And as Fil said, we're joined by Vanessa, who's going to help with all of the difficult financial questions and the easier ones I'll take them, okay, Vanessa? And we've also got all the members of the GMC. So Andrew David, who's the CEO of Qantas Domestic and International; Gareth Evans, who's the CEO of the Jetstar Group; Andrew Parker, who's our Chief Sustainability Officer in new role that we've created over the last year; Andrew Finch, who's the Head of the Office of the CEO and Legal Counsel and Company Secretary. Andrew McGinnis, who's Corporate Affairs and Government Affairs; Steph Tully, who's in charge of our customer area, the Chief Customer Officer; John Gissing, who I keep forgetting what he's incharge of but it's a variety of things, including QantasLink. And then we've got Olivia Wirth, who's the CEO of Qantas Loyalty. So thank you very much for everybody for joining us today. And today, we're going to cover the analyst briefing for our '22 financial results. And I'll be using the GMC also to answer some of the questions when it relates to those individual business. The format that we're taking this year is very similar to last year. So it's not the very long presentations that we did in the past in going through the slides. I'll give some opening remarks, and we'll take most of the time to answer questions. We will say at the time, we're trying to ask everybody to ask one question. I think we have 14 analysts that are covering us. So if people ask multiple questions, we'll be here all night, and we've got to go on to a staff roadshow. So today, the Qantas Group announced an underlying loss before tax of $1.86 billion for the financial year 2022. The statutory loss before tax was $1.19 billion and included a one-off gain of EUR 686 million from the sale of surplus land in Mascot. At an underlying EBIT level, the result was a positive $281 million. This included $526 million in the second half. In the top half of the guidance range we provided to the market back in June. The numbers we report today includes the full impact of the Delta and the Omicron lockdowns as well as the cost of restarting the airlines. This is our fifth consecutive statutory half year loss and takes our total losses from the start of the pandemic to well over $7 billion. It's been $25 billion loss in revenue since the start of the pandemic. It's fair to say that the last 12 months have been challenging for the Qantas Group, for our people and unfortunately, for our customers. This time last year, almost all of Australian borders were closed. Most of us were stuck at home and our A380 fleet was parked in the desert. Fast forward to today, borders are open, flights are full, and those A380s can't return fast enough. In the second half of the year, we also had to deal with the emerging challenge of record high fuel prices. Our disciplined hedging program brought us time to adjust capacity settings. However, fares will inevitably rise. Average flying for the year was at 33% -- whoever gets me to say 33% all the time -- 33% of pre-COVID levels, but this was very much a tale of two halves. Total group capacity went from just 13% in September to 68% in June. This rapid return of travel brought with it some difficulties as many of you, our customers, have experienced. With all of our Australian-based workforce stood up from December trending under way and are powerfully coming back, we plan for the recovery. What we didn't plan for, and we weren't ready for, is that after 18 months of COVID being suppressed was the high levels of community transmission and the isolation and sick leave that followed. The rebound in travel also coincided with the tightest labor market in almost 50 years. This resulted in the recruitment challenges for some of our partners as they also ramped up operations. All of this led to some well-publicized problems across all airlines and airports, long queues, the late flights and mishandled bags. It has been incredibly tough for our people and deeply frustrating for our passengers. Despite the underlying reasons for the disruptions, our performance simply hasn't been good enough. And for that, we have apologized. We've announced a range of initiatives to thank our customers for their patience during this trying times. This included a flight discounts, status extension and a big increase in classic reward seats for our frequent flyers. Importantly, there is a lot of work happening to get Qantas back to its best. We're temporarily reducing domestic flying. We've increased minimum connection times. We've hired more people, and we're investing in technology to improve the check-in experience. We've already seen big improvements in baggage handling and reduced cancellations during August on a way to pre-COVID level standards, and we expect on-time performance to get there in September. As we navigate these challenges, our focus on our 3-year recovery plan has remained. Net debt ended the year at $3.9 billion. This is now below the bottom end of our target range and the lowest level in over a decade. Cash flow has also been restored with 3 quarters of positive net free cash flows supporting the balance sheet repair. Our $1 billion restructuring program continues to track ahead of schedule with $920 million delivered and 90% of the initiatives now complete. With COVID-related deferrals behind us, we've also commenced investing in our fleet. Just last month, the first of the group's new narrow-body aircraft arrived in Jetstar, the A321neo. These next-generation aircraft fly further, carry more people, generate less noise and burn less fuel. In fact, on its first flight from Melbourne to Karnes, our new Jetstar 321neo burnt 25% less fuel than the older technology aircraft they replaced. That is 2.5 tons less fuel exceeding our expectations. The investment in fleet also comes with new investments for our customers, including upgrades to lounges in Auckland, Adelaide, Port Hedland and Rockhampton. We're also investing heavily in our people. Our training pipeline has never been busier. And today, we officially opened our new cabin crew training center right here in Mascot. If you haven't had a chance to see for those people in the room, it's right next door, and it's spectacular. We know that the pandemic has been tough on our people. Many of them were stood down for months, and they have done an incredible job through a challenging restart. I sincerely thank them for that. Now that we're moving back to profit, we are sharing the benefits of that recovery. We've already set aside $200 million to give nonexecutive staff a 5,000 recovery bills and 1,000 Qantas share rights, which is worth roughly $5,000 at today's share price. Today, we also announced enhancements to improve the value of staff travel, and we know that is something our people really care about. We got a great reaction in this room with that, didn't it? Turning now to the segment performance. Qantas Freight and Qantas Loyalty continue to be valuable contributors. Freight posted another record performance in financial year '22, supported by structural growth in e-commerce and the benefit of high international yields, which will moderate for freight as international capacity returns. Qantas Loyalty also performed well, having provided the group with 3 years of strong cash receipts, earnings and now rapidly recovering. Loyalty EBIT returned to double-digit growth in the second half. This strong momentum gave us confidence to expect earnings in financial year '23 will be above the record results in financial year '19. Our domestic flying was deeply impacted by COVID for much of the year. However, fourth quarter performance provided good insights into the recovery ahead. Underlying EBIT from the group's domestic business was positive for the fourth quarter with business purpose bookings back at pre-COVID levels and leisure booking significantly above that. Group International also saw emerging strength with both Qantas and Jetstar achieving strong double-digit RASK growth by the end of the quarter. With fuel remaining elevated, this momentum is clearly needed. New routes remain a feature of bulk groups with Qantas Domestic now flying 30 routes compared to pre-COVID at Qantas International announcing new routes, including Delhi, Rome, Bangalore and today's news of Auckland to New York. The group enters financial year '23 with its balance sheet repair, effectively complete and a clear path to improve in COVID related operational challenges. We did know the market is wondering while impact higher interest rates will have on our consumers. Our research and that of the major banks indicate that travel intentions and spending on travel will continue to remain a priority even as other discretionary spending may be constrained. This gives us confidence in domestic travel demand. International travel is also expected to remain strong with market demand, again, expected to exceed supply throughout financial year '23, and we think financial year '24 and probably even into financial year '25. We have the settings in place to fully recover the impact of record fuel prices. Our transformation program will be complete in financial year '23, and we have additional initiatives in train to offset CPI increases and ensure the benefits of the program hit the bottom line. Throughout COVID, our shareholders have shown strong support, providing $1.4 billion in new capital to fund our recovery and to get us through the crisis. With net debt below our target range, we're now in a position to return some of that capital. In particular, I'm pleased to say the board has approved an on-market buyback of up to $400 million in line with our financial framework. Recommencing distributions demonstrates the confidence we see in our financial position and in particular, in our outlook. There's no doubt, the past few years have been incredibly tough for our industry and our business. I want to thank you again for your support with the most challenging times and your patience as we restart and ramp up our operations. With our performance improving and the signs of strong travel rebound being sustained, there's a lot to be optimistic about. Thank you, and we'll open it for questions. First question?

Your first question comes from Matt Ryan from Barrenjoey.

Alan, I just wanted to follow on with those comments that you just made about, I guess, consumer patterns. Obviously, unit revenue is a pretty key feature and a number of things within your forward-looking guidance. So -- just interested in whether you're seeing any pushback at all on price in the July or August period? And if you could just make some comments more generally of what you see on the ground today?

Yes. I might open and I might get Andrew David just to talk about what we're seeing in demand for domestic and international as well. So what's very clear is that even though we've had these operational issues that we're fixing, demand hasn't been impacted. If anything, it's gone stronger and stronger during this period of time. And we're seeing, at the domestic level, over 125% of pre-COVID levels of demand and revenue coming in. And we're seeing a rapid improvement in the business market up to 90% of pre-COVID levels. And that is actually a really good number when you consider there are a lot of businesses with people not going to the office, a lot of people staying at home because it is COVID and flu wave. So we expect that to improve and to get back to pre-COVID levels, which would even enhance what we're seeing today. And what we are also seeing is that all of the carriers domestically are taking capacity down because everybody has to recover fuel price. We're seeing the market of roughly 90% of pre-COVID levels. in order for us to get an improvement in RASK. And I'll get Vanessa to talk a bit about what we need to get in terms of RASK improvement, to cover the elevated fuel price and where we stand on that. But I might ask Andrew to talk a little bit about what we're seeing across the different segments and the different industries, what we're seeing across domestic and international, Andrew?

Yes. Thanks, Alan. Matt. Let me start with international. So what we're seeing is that intent to travel over the next 12 months is 60% higher for international travel than it was pre-COVID. So it gives us a very strong indication that the demand will continue. From a supply capacity perspective, Alan went through these numbers this morning. We will be at about -- this is Qantas International. We'll be at 72% of our capacity for FY'23. The market will be at about 62%. For FY'24, our forecast is we'll be back to 100%. We expect the market to be about 80%. And it's not until FY'25 that we expect the market in full to recover 100% against pre-COVID numbers. So the demand is there, the demand exceeds what we were seeing in FY'19 and the supply is going to take a few years to come back. And by the time we get to FY'25, Matt, we will be then taking delivery of both the Sunrises aircraft, the A350s, and we will also have the A321s in our fleet, both those aircraft will allow us to do more point-to-point flying. And we'll have a greater premium mix, which we believe gives us a strategic advantage over our competitors. We continue to grow the international routes we're flying, as Alan said. We've announced 8, we're flying 2. The most recent being this morning's announcement. We're going to start flying Auckland, New York direct from June of next year. So that's the international. Building on domestic, as Alan said, there's rational capacity settings in the market. We've seen the return of both leisure and business travel. What we are also seeing is that there is an 80% intent to travel -- so intent to travel over the next 12 months domestically is up 80% against pre-COVID level. So the demand is there. The demand indications are that it's here for the next 12 months, the supply settings are right. The other factors I'd just add to the domestic position is between Qantas and Jetstar, we now have a larger share of the market. So we were low 60s. We're now high 60s. We have a greater share of the SME market. We're now mid-50 share of the SME market, and we've got a greater share of the corporate market. We're low 80s. So settings are right. We continue to invest in our domestic business. We're now flying 132 routes. Pre-COVID, we were 101 routes. We've taken 12 Embraears through our arrangement with Alliance. We've got 12 Embraers now flying in our fleet. That opens up the opportunity to service new markets. Our intent is to acquire 100% of that business. We've got 11 A320s in the Western house part of Network Aviation, which gives us greater access to both RPT and charter flying in the West. And the resource demand has continued throughout COVID. So I think we're very, very well-positioned, both domestically and internationally, and the market conditions are set right as well.

Vanessa, do you want to talk about yet?

Yes, absolutely. The fuel outlook, which you would all know is pretty high. It's much higher than it was in FY'19. Actually, in the quarter that we're in, fuel price is 80% higher, and it's the highest fuel price that the group has ever seen. And as Alan said, all airlines will be suffering from that. It actually has a forward curve that tapers off over the year. We really hope that happens because that's going to be good for consumers as much as it's going to be good for our fuel cost. But given that curve, we need to, and we've always said that recovering the cost of fuel through fares is absolutely an important part of recovering that cost. So for domestic as Andrew was saying there with a strong demand environment and with disciplined capacity. We need a 10% RASK improvement across the year to cover fuel, and we're feeling very confident that we're seeing that with international because we consume more. It's a bit larger, it's 20% across the year and also given that strong demand and that lower supply environment because of the capacity taking long to come back on, that needs. So it is -- we feel very confident that we're in a good position to be able to recover a few.

Your next question comes from Jakob Cakarnis from Jarden Australia.

One for you, Vanessa, can you just step us through, please, the rebalances where you are in terms of the cover cancellation credits and how they're exhausting and maybe the run rate that you guys are expecting for that and working capital into FY'23, please?

Yes, absolutely. So I might start with an overall comment about our working capital rebuild. You will see there that we've called out in our presentation the credit balance, and I'll talk about that in a minute. But I think what is fantastic is that our working capital has rebuilt now to what it was pre-COVID for passenger revenue. That was always a permanent part of our balance sheet pre-COVID. And we always said that when capacity was going to come back, that would rebuild. So I think it's really pleasing to now see that, but also that loyalty is maintaining a permanent increase in its working capital value, which will be a key part of the strategy of how loyalty managers going forward. If we just step back and have a look at credits, we had a reported peak of credits at $1.6 billion, and we're now saying that our credit balance is $1.3 billion. That might sound counterintuitive because we're also saying that we've got a burn rate of around $80 million credits per month. I think we've just got to reflect on the 2 years that we've had. We have actually seen our credit balance increased from five separate lockdowns over 2 years. So the original lockdown when all borders were closed in March '20. Then in July '20, we saw Victoria, Melbourne and New South Wales going to the long lockdown period off a back of capacity having been built back up. And we're all chasing that those elusive donut days. Capacity then came back for that Christmas. We then had the Northern Beaches locked down, which caused us to look to bring capacity down again. Then we had Delta, and then we had Omicron. So we've actually seen that over that period of time, the total credits associated with covers that we issued was $2 billion over that period of time. And we have given a credit vouchers used $1 billion. So 50% over the period of time of COVID, we have enabled 50% of credit redeemed. So we feel really confident that customers are using their credits. There's easy access to that. We're improving the access to credits because we want every customer between now and December '23 to use their credits and we'll be communicating to them. We'll be reminding them, and we'll be providing them new ways of accessing that online. But also in the coming weeks, we'll be putting on a dedicated concierge phone number where customers can call a dedicated team in our contact centers for help if the need it.

Yes. Great answer for that. I would add to this. I mean, we are getting $80 million being burned every month in credits. So if that run rate keeps up, we'll easily have them all views by the time we get to the end of '23. And we want this to be elevated. So we've done that. As Vanessa said, the concierge service, our call centers are performing unbelievably well. better than recover time, so we can dedicate a dedicated team in order to do this and make it easier for everybody I think it will be a really good news probably. I will point out that we're the only airline that has done this. So a lot of airlines out there haven't made this easy. A lot of our competitors, people have lost their abilities to have these flights going. So this is a great customer service initiative Qantas put in, and we're pretty proud that we're making it easy for people to use and it will get easier.

Your next question comes from Justin Barratt from CLSA.

Alan I just wanted to ask about your -- I guess, your strong RASK performance in the fourth quarter of '22. I was just wondering, particularly domestically, I was just wondering if you could sort of break that out between improvement in load factors and price improvements or price increases? And I guess where we've seen RASK growth so far in FY'23?

Yes, Gareth can answer this one.

Yes. Hello, everybody. So yes, we've talked about Andrew gave a very specific answer. Alan has talked about the RASK improvements we're seeing. And -- and certainly, that is very much the case. The double-digit RASK improvements as we went through the final quarter of last year and into the first quarter of this year. And obviously, that's necessary given the high level of fuel prices, but it isn't all coming from price increases. There have been some price increases. Price increases have gone into certain markets. In certain markets, they've gone in and come out again. But overall, there's been a level of price increases, but it's also being managed in a number of other ways. So from a Jetstar point of view, we've seen significant strengthening of load factors as well. So just to give you an example, last weekend, which August is not a peak month for travel, but we were operating at 95% load factors last weekend. So right across the board now, we're seeing load factor improvement. That's a way of getting RASK up. We're also seeing very, very strong ancillary revenue growth as well. So partly, that's consumer choice. Consumers are choosing to buy those ancillary products and partly that's some of the tools that we've put in place along the way to make it easier for customers to select and buy ancillary revenue. And right across both airlines as well, we're revenue managing actively too. So it's not just about price increases, but it's about how much inventory you sell in the various price buckets along the way. So it's a combination of all of those things across both Jetstar and Qantas that are driving those RASK improvements. It's certainly not just about price increases, though they are an element to it.

And I will say from the consumer point of view, there is actually a really good story out there as well. We were saying that Jetstar is likely to carry 13 million to 14 million passengers this year of $5 million, nearly optimal travel for under $100, $10 million for under $200. While airfares have gone up to cover fuel, it's still an amazingly cheap airfares out there. And you think if you go back 20 years before we started Jetstar when it was [indiscernible], the airfares would never have gotten to those levels even with 20 years of inflation and record high fuel prices. So the consumers are still being given very attractive airfares to get them to travel and the fact that we can do both, recover oil and still deliver those airfares and make money is a really good thing. Next question?

Your next question comes from Anthony Longo from JPMorgan.

Just a quick one for me. I appreciate -- just mainly focusing on the cost piece. So I appreciate you have made some challenges sort of made some hires to address some of the industry-wide challenges that the industry is facing. How should we be thinking about maybe a step change in costs such that you can still deliver that premium service? And I guess a follow-on from that, we have spoken about RASK already. But at what point do RASK increases become prohibitive and detrimental to demand? And how should we ultimately be thinking about that premium to your peers?

So on the cost front, Anthony, I think that in the investor presentation, we have outlined that there is direct operational costs from the disruption that we have been experiencing, including the cost of recovering customers, including the cost of over time, and we valued that at around $35 million. we don't see that, that is a permanent part of our cost structure because we are doing everything that we can that brings the operation back to its pre-COVID level, and we're there on a number of metrics, including lost bags, call centers, for instance, in call wait times, but we're heading in the right direction on the OTP, and we're really confident that we'll be very close to getting back to pre-COVID levels by September. Given that, we have, in this period, have a unit cost impact of a lower level of capacity. But that is actually really a function of the fact that we've got overheads, a lower level of capacity than we had prior COVID. We've got depreciation on those assets as well. And also a purpose of a lower level of capacity was to enable us to have a sufficient amount of reserves to be able to respond when we have spikes in sick leave. We will see that, that's going to translate into a unit cost impact when we report at the half. But once again, we don't see that that's a permanent part of our cost structure because we are very confident in managing to the current operational metrics that we set. And then over the coming period, we will just add the capacity back in as we feel confident in those settings and build into the forward part of next year. So we see that RASK, as we said before, is covering fuel, but it's also covering the unit cost of that impact and also the disruption cost. We've spoken about the strong demand that we're actually seeing as well. We have not seen any impact on demand at the moment with RASK where it is. And also, though, over the forward curve, as I said, it's a declining forward curve. So we will see that RASK, overtime, eases as fuel price falls and also as capacity comes back online. So we feel really confident in that demand environment, the capacity environment. Very confident that RASK will be sustained.

And just to reiterate, and the last part of that, so I think Andrew mentioned that we are seeing the propensity to travel nearly double what it was before COVID where people having that desire. And some of the banks our Polish reports, as I mentioned in my opening statement that says, in priorities, travel has a higher priority than other discretionary expenditure. So it's probably going to be the last one to be squeezed, which is a really good sign that we think this demand environment will last for some time. I'm probably not a surprise. Everybody has lost over 2 years of travel. Everybody wants their holiday, visiting those family and friends, to make those important business trips that you missed out on. So we don't see that changing. And then as Andrew mentioned, again on the stats, we see capacity. We are trying to get as many aircraft in as we can, but we just do not see supply meeting demand because internationally, those stats, again, is that the market, the competitors in and out of Australia are going to be at 62% of pre-COVID capacity this year -- financial year. They're going to get to 80, we think, next year and 100 a year after. That's 100 of pre-COVID levels. We've had 5 years of growth in the economy since then. So that's still under serving the market. We could get more A380s in the air. If Boeing hasn't delayed the 787s till next year, they'll be flying now. But we're still, like every airline in the world, stuck we're having this limited capacity, which is going to be. There's a lot more demand than there is supply, and that does result in higher RASK. That's just the nature of it. Next question.

Your next question comes from Andre Fromyhr from UBS.

Hi, everyone. My question is about guidance on looks like the statements around CapEx next year have come down a little bit than some of the drivers of that change and potentially expanding on how much of that is committed versus flexible? And how you line up your CapEx intentions with capacity growth?

Yes. So the first answer to the first question is really simple. Our guidance have fallen because we actually had early payment -- actually one day early to Airbus of a PDP payment that we had budgeted for next year that is now in the CapEx guidance or the actual CapEx we reported for this year. So we've adjusted the CapEx guidance accordingly. The second question was, there is still flexibility in our capital pipeline. It's not -- in terms of the aircraft deliveries, that's probably less flexible, but we do have CapEx in that pipeline for non-aircraft investments. And we will, as we have in the past, managed through the financial framework to ensure that our CapEx is in balance with the cash flows that the business is going to produce, but we are very confident in the outlook of this next financial year and feel that the cash flows of this business will be able to not just afford, the CapEx that we have guided in '23, but also afford the surplus and distribution that we have declared for the buyback of $400 million.

Next question?

Your next question comes from Niraj Shah from Goldman Sachs.

Firstly, I just wanted to be crystal clear on sort of one point. Are you guys saying that for both domestic and international, current unit revenues versus pre-COVID are at or above the levels, the 10% to 20% you quoted to recover fuel. And then sort of separate to that. I just wanted to ask on Loyalty. It's a pretty substantial uplift from '23 into '24. I was just wondering outside of the KPIs you present there what else needs to sort of fall in place to get to sort of the middle or top of that range?

So on the first question, the simplest answer, I'll have given all that, it's just yes. And on the second question?

I don't think a yes will cut my answer, Alan. So look, you're right, let me, I guess, unpack the result today for loyalty. You will have seen that we actually provided a guidance for the year for FY'23 between [ 4 25 and 4 50. ] And we did that for a reason, firstly, to demonstrate that we have confidence in not only delivering for FY'23, but also achieving the FY'24. And that's predicated on a few things. If you look at the results in the second half -- and actually, if you look at the fourth quarter and the performance in that quarter. So that was double Q3. It shows the strong momentum in our business, and that's driven by a number of factors. Firstly, obviously, consumer spend coming back to pre-COVID, which is obviously critical for revenue coming into our business. Equally, the acquisition of Qantas Points and credit cards is getting back to pre-COVID levels well, and we're seeing a return to travel. So strong consumer spend is driving the result for Loyalty. Equally, we've put two new numbers in the results in addition to the FY'23 result, which is trying to give greater transparency on the core drivers for this business. So it looks at membership and the engagement and additional members required to drive this flywheel. And then there are two equal parts, which are about the number of points required to earn and the number of points required to burn to achieve FY'24, and we give you some estimates there on the growth required across these three core drivers for our business. Underlying all of this is the ongoing diversification for earnings for our Loyalty business, including financial services. We're well-established, obviously, in the credit card market. We still got 35% of that sector, but we have intentions to continue to grow that and our exposure to financial services products in the next couple of years. Obviously, program strength in terms of growing membership. We've got 1 million additional members inside the frequent flied business compared to pre-COVID, which shows that we can continue to grow even in a very challenging environment with the airline on the ground. We're seeing strong growth in member engagement and ongoing additional members into our business. So that's, obviously, a positive as well. And importantly, we've spent a lot of time really getting under the hood of redemptions. The burn aspect of our program is equally as important as our earn. We spent considerable time working out how we really drive, obviously, flight redemptions, but importantly, the non-air flight redemptions. And there's been significant shift in our consumer behavior. We changed the value or improved the value, for example, in hotels and holidays, reduced that by 35% to 40%, and we've seen the number of members redeeming points basically doubled compared to pre-COVID. So that's a significant shift at a sustained level, which gives us the confidence that not only we drive revenue through existing partners and new partners, but we can also equally continue to build out that non-earned redemption. So hopefully, the transparency around those three drivers, the fact that we've provided FY'23 target, which we're confident in heating, which then gives you the right trajectory to hit FY'24.

Next question.

Your next question comes from Owen Birrell from RBC.

Just a question for me, I guess, on cost inflation and sort of presenting a major headwind to a lot of different sectors in the in the economy as we move through FY'23. I know you've covered off on fuel costs that have been covered by RASK improvement. I really just want to turn my attention to things like labor and the operating costs or your ex fuel costs, which, if I recall, historically, you sort of put out targets around about sort of $200 million of cost savings to cover off that each year as sort of pre-COVID. Now that was when inflation was running sort of 2% to 3%. Now we've obviously got a much steeper rise arrive into FY'23. I'm just wondering if you can give us a sense of, I guess, what are these additional cost reduction targets that you've set out in the pack for FY'23, whether you can give us a number or a marker that we can sort of look to? And also what some of the strategies and initiatives are behind that target?

Yes. So just our run rate prior to COVID for the general level of inflation was around $250 million. And over the 3 years, so we haven't -- even though we've been in lockdown and our aircraft have been grounded, we have kept an eye to what the underlying level of inflation has been running through our business. And we've estimated that at around $180 million over the 3 years, with a higher level in '23 of around $200 million, which does recognize the fact that inflation has ticked up and that, that is actually flowing through parts of our business. To give you a flavor, though, of how that breaks down, as you said, it's wages, which is around $70 million this financial year, that's on the assumption of our wages policy of 2 years at 0 and then 2 years [ percent ] thereafter. And that is about not embedding what is probably going to be a transitionary impact of inflation in our business because we know that the RBA is using the levers, the monetary levers that they have to return to long-term inflation of around 2% to 3%. Having said that as well, there are other parts of our business that have inflation to give you a flavor of that. 95% of our contracted supplier cost, which represents around 40% of our total cost, has inflation clauses in those contracts. So 30%, we have no inflation embedded in those contracts. Another 30%, we do have inflation, but it is at a lower level. And it's also, therefore, very clear and very known what that cost is. So if we add that all up, as I said, for FY'23, that's around $200 million. What we are doing -- and this has been a discipline at Qantas for as long as I can remember in the last 10 years, that every year, we have tasked the business to look to additional cost savings, both also revenue initiatives to offset that pre-COVID that was around $400 million a year, and that was split between 60% cost and 40% revenue. What are some of those initiatives? I can't go through them all, but three that I'll give you a flavor of. Both Qantas and Jetstar are investing in digital teams to unlock value through ancillary revenue, as Gareth mentioned. We believe that there are great opportunities to add value to the ancillary pipeline but also to add value to the customer. So this is not mutually exclusive in terms of customer benefit. Other cost initiatives using technology as well, digitizing, for example, the newspapers on our domestic flights were used to provide a newspaper to cost. But now given that we've got WiFi on most of our aircraft, we're delivering that digitally, which is delivering a saving. Our engineering team have worked incredibly hard during COVID to renegotiate contracts. One highlight has been a renegotiation of the cost of the A380 engines, which is going to deliver as well as substantial value. So we feel really confident that the business is back in that normal mode and DNA of continuous transformation, and that's just going to be ongoing and it's just a part of business life.

Next question.

Your next question comes from Paul Butler from Credit Suisse.

I just wonder if you could give us an update on your negotiation with -- in regard to labor deals and the risk of any industrial action -- just in particular, I mean, given that we're seeing very high levels of CPI in the economy and the labor market is clearly quite tight. And I think you're looking for wage deals of 2 years of flat wages followed by 2% increases. Is that sort of realistic in the market context. What's the response you're finding?

So yes, our logic has been that we've had 3 years now of significant losses for that period of time. We haven't paid and don't pay anybody wage increases and that we have offered 2% post that. In addition to that, we've also, as Vanessa talked about earlier, put on the table for all 17,000 nonexecutive employees, over 5,000 bills to help get through this current transitory inflation as the RBA has called it. And on top of that, we've offered 1,000 shares for the recovery plan, which will be more 5,000 now, hopefully, a lot more than that by the time the shares a ratio at the end of next year, if certain targets are met across the company. And what we are finding is that for the vast majority of our employees and our agreements, that's been received really positively. We've now signed up 30 different agreements, 5,000 employees to those new arrangements. And we are in dialogue with multiple other agreements are making really good progress. There is one group, which is the engineers that have said that they want a 12% annual pay increase. Obviously, that's not viable. And that's a claim that we can't agree to nor will agree to. What's pleasing what the union has said, which is that they have no intent to harm the traveling in public. They have no intent to disrupt the traveling in public. They had today taking a 1-minute stoppage at the start of the day across the network as part of the industrial action. We saw no impact in the operation. In fact this morning, was the best first wave the parts I've seen in months. We were over 92% on time for the first wave. So they have lived up to that promise. And we'll make sure that the union leader honors that promise and doesn't impact on the traveling public going forward. We are in dialogue with them, and we're hoping that we can get good conclusions out of that. They realized the restrictions that are on us. And there are other things that come into those negotiations, which shift with how the ships work in some of the individual ports that we're working through. And we're investing very heavily in our people in those individual areas. I think Andrew David was up meeting them just last week and had a very productive dialogue with a lot of our engineers on the ground. So our belief is that we will be successful with this pay policy. We are in a position where we are continually rewarding our people and the company does well before COVID outside of the EBAs we also gave over $200 million in bonuses that weren't in the EBA. And our philosophy has always been when the company does well. We do reward our people. And today, we also announced a significant improvement in staff travel, which has had amazing reaction from our people across the network. So Paul, I'm still very comfortable and confident that we will get those agreements in place. And I take deep comfort with the union leaders say that they will not disrupt the traveling public after two years of the traveling public going through what they've gone through. And our colleagues having to deal with the disruptions over the last few months, I think it would be unfair to the traveling public and our colleagues if any action more than what's been outlined took place, and their commitment is not to do that. Next question.

Your next question comes from Cameron McDonald from A&P.

Alan, just a quick question on International, please. It was 75% expected capacity backed by FY'23 for the year. What routes and how much flexibility have you got to bring back that capacity faster noting that you said earlier in your presentation, if you couldn't bring back capacity fast enough. And secondly, what are the routes that you're not currently flying either you would like to be flying. Secondly, are there any routes internationally that you don't think you will fly again?

Maybe I'll start and I'll get Andrew David to cover this as well. So the issue is that it is all about supply of aircraft as the big driver because the Boeing delay, as you're probably aware of, affected 100 I think 30 787s around the globe. We were not the only ones impacted by it. They needed to get the FAA to certify some work. There was a backlog on that. We finally have seen those aircraft starting to move now after 2 years, but we will not get them absolutely until the last quarter of the financial year, but at least we now have a date because that could have been later. So we can't get them on the earlier. They were part of our original plan to get back to 100% and replace the 747s. And the A380s similarly, we, like a lot of airlines assumed, and I think it was probably some of the forecasts out there from a lot of the analysts that international demand wouldn't recover back till '25 or even beyond that. So we were assuming those aircraft will be packed in the desert for a long time. There's lots of maintenance needed on them, including this big 12-scheck, which takes 3 months. And every airline in the world is out there trying to maintain and get their aircraft back. But what Andrew outlined earlier, we're ahead of whatever other airline is into Australia. So in terms of that capacity, there isn't much options to bring it forward. And similarly, with Jetstar activating as many of their 787s. It's a bit ahead of Qantas at the moment. The big issue for Jetstar is the full opening of Japan, which we're still waiting for a final decision to be made on that. And when that happens, Jetstar can get back to the pre-COVID capacity levels that we had there. So I'll let Andrew talk about some of the other markets that might be complex that we're still looking at and seeing when they will open and what our views on that are.

Yes. Thanks, Alan. And just finishing up on what Alan was saying about supply, not only do we have the engineering challenges to deal with. We've also obviously got to make sure everybody's crude and the complexity simply everybody is trained. And the complexity there is considerable when you're talking about pilots, cabin crew, airport staff, engineering staff, et cetera. So we just got to work through that. Unfortunately, as Alan said, we really don't have the option to bring those 3 789s forward. And we're managing the 380s very carefully. They have to go through a 12-year check. They're going through a full reconfiguration of the cabin, and they also have to have a landing gear overhaul. We've currently got 5 back in the operation. We'll have 7 back by end of financial year. In terms of markets, the three markets that we haven't gone to as yet are the three markets that are still have border restrictions in place, Japan, Hong Kong and China. We start flying Japan from next month. We start flying Hong Kong from start of Northern winter. We're not intending to fly into China until the start of Northern Summer. The markets that have performed particularly well for us are the U.S. and the U.K. What is also very pleasing is the new markets we've entered into have gone really, really well. So Delhi has performed very well. We start operating into Bangalore next month. Our roam service that we ran over the Northern summer period was very, very popular. We will be bringing that back next year. We start operating Perth to Joburg and Perth to Jakarta. Both those markets are going well. We start operating into Inchon at the end of the year, and we're very, very encouraged with the booking levels we're seeing on that market. And of course, this morning, we announced Auckland JFK, which we are very, very positive about the demand out of this market for New York and the demand out of the New Zealand market for New York direct services, we think, will be very, very strong. And as Alan was saying earlier this morning, a lot of Americans coming to this part of the world are [ Jill ] destinations. So they intend to visit both New Zealand and Australia. So we think that's going to be a great service. So we feel we're in a strong position internationally. We're seeing growth, and we're responding to that growth and where border restrictions are still in place. We're managing our capacity very carefully in line with the demand.

Your next question comes from Anthony Moulder from Jefferies Australia.

That's added that some other person call on to. Very strong loyalty results in the second half of '20, which I expect it was supported by market share gains in both corporate and SMEs. But it sounds like share 50s in corporate at low 80s would suggest that we still remain on further upside to market share gain. So are you expecting to see further market share gains through '23 and '24 in both of those segments in particular for the benefit of flying and loyalty.

Yes. I'd like Andrew David to do this one as well. So did you hear the question? Do you want to go for it?

I don't know what you were like at school Anthony, but I knew if I got an A-, it was high to get an A+. So if you're at low 80s to gain much more share in the corporate market will be challenging. We do see further upside potential in the SME market. As we said, we're in the low 50s with the network we now have in place with the investments we're making in our systems with the investments that have been made in our loyalty program and our Qantas Business Rewards program, we have seen great response to that. I mean, the stronger our loyalty program gets the more the offer strengthens for the SME market and indeed the corporate market, but particularly for SME markets. So we do see growth opportunities in the SME market. As I said, with corporate, there is a ceiling on this. We're very strongly positioned with resource, with government and with the construction markets -- those markets are coming back to pre-COVID levels very, very quickly. Indeed, with the resource market never went away. It's just grown. We've grown our share of the charter market. That is treated separate from what we report in terms of RPT. So I think that's the overall position opportunity certainly in the SME market.

We've got one last question online. Last question.

Your final question comes from Sam Seow from Citi.

Glad to be profitable again. So just a simple one for me, hoping to get some more clarity about the commentary this morning about recovering all your costs through price. I mean, if domestic is at 100% capacity in FY'23, should we be expecting 100% profitability, if not more, given the cost out and I guess taking price and market share go hand-in-hand. So just wondering how you're tracking on your 70% guidance? Or is that not relevant in...

I missed the last part.

The last one. I'll do the second, the 70%.

So Sam, look, I think that absolutely, domestic capacity being back at 70% with the assumption that we're covering -- 70%, I'm getting tired I think -- back At 100% for the year and with the assumption that yes, you can interpret that versus FY'19, if we are covering the cost of fuel at 10% versus RASK in '19 that we are returning to a profitability run rate that is comparable. You need to, though, pay regard to the transitionary costs that we've outlined, plus also that we're very confident that we're going to hit $1 billion cost program in '23. So we feel very confident that the domestic businesses are returning to strong profitability with the backdrop of the demand outlook and that intent to travel that Andrew talked about, we're very optimistic about the outlook for domestic and international.

And on the 70%, when we look at the market research, nothing has changed on that. The preference for Qantas and Jets there gives us a natural market share of 7%, 8%. But in the current environment, our biggest focus is to get reliability back to the schedule. And that's what we're doing and to recover oil prices and the recovery of the cost that COVID is actually generating for the business. So the market share will be what the market share is because our priority is to do that. We are deliberately making sure that we have enough crew reserve enough aircraft in reserve to cope with COVID. So that means that would be aircraft that you would have used to get your natural market share that we're using to get this reliability and the customer satisfaction up. That will be our intent until we can see what happens with COVID and hopefully, we see the back of -- but we've been sitting here for 2 years thinking it's all over and it gives us surprises. So we're going to be cautious with this for a while until we know exactly what's going to happen. But at the end of the day, we think our natural share is around the 70% mark. But in the current environment, we have higher priorities. Thank you, everybody. It's been fantastic. So thank you for all the questions. Thanks for the audience. You all paid attention. I've got questions there. Thank you.